Stock market is nervous about exchange rate fluctuations

While the USD exchange rate recorded a remarkable breakthrough in the first week of April 2024, the Vietnamese stock market had a rather long losing streak.

Beware of exchange rate heat

The VND/USD exchange rate at banks started the first week of the second quarter of 2024 with an important milestone: surpassing the psychological threshold of 25,000 VND/USD and setting new historical peaks. Up 0.6% for the whole week, but looking back over the past 3 months, the VND/USD exchange rate has increased by over 2.9%, equivalent to the increase of last year.

Also in the first week of the second quarter, the stock market witnessed an unsuccessful attempt to “buy the bottom” in the Friday session (April 5). The attempt to turn the tide was extinguished by strong selling pressure, especially in the regular order matching session to determine the closing price (ATC). The above signal, according to Mr. Dinh Quang Hinh, Head of Macro and Market Strategy Department, Analysis Division, VNDirect Securities Joint Stock Company, is a warning to investors to be cautious.

The VN-Index's correction week came as concerns about exchange rate risks increased. Previously, through open market operations (OMO), specifically the offering of treasury bills, the State Bank of Vietnam (SBV) had a total net withdrawal of more than VND170,000 billion. The above volume is nearly half of the total value of treasury bills issued from September 21 to November 8, 2023 (VND360,345 billion). However, the regulation of short-term treasury bills to reduce excess liquidity has not yet shown a positive impact on the exchange rate as it did in the third quarter of 2023.

With the same old measures, the VND/USD exchange rate at banks has not shown any clear signs of cooling down. The exchange rate movement and the issuance of treasury bills in the third quarter of 2023 had a negative impact on investor sentiment due to concerns about the possibility of a monetary policy reversal (but in reality it did not happen). Concerns about "rehashing the same old story" and the exchange rate's surge have had a significant impact on investor sentiment in the stock market and have not been ruled out as triggering a sell-off last week.

“The VN-Index is in a short-term downward trend and may adjust to the support zone of 1,230 points (+/-10 points). However, investors should not rush to catch the bottom in the context of the exchange rate heat showing no signs of cooling down and market fluctuations at a high level,” Mr. Hinh recommended.

DXY unknown and when the Fed will cut interest rates

Looking back at the developments in the first week of April 2024, not only Vietnam, the exchange rate between the currencies of many other Southeast Asian countries and the USD increased from 0.5 to 0.7%, typically the Lao kip (+0.67%), Myanmar kyat (+0.61%), Philippine peso (+0.58%), Thai baht (+0.49%)...

Exchange rate increase of over 3% will affect the economy

If the VND/USD exchange rate can remain relatively stable, increasing by less than 2%, it will not have too much impact, and at the same time support exports, especially in the context of many currencies depreciating deeply. In case the exchange rate increases by more than 3%, it will affect the economy when import-export enterprises are at a disadvantage in terms of exchange rate differences. Moreover, strong fluctuations in the exchange rate also immediately affect foreign capital flows trading on the Vietnamese stock market, possibly causing foreign investors to withdraw capital.

Mr. Tran Hoang Son, Director of Market Strategy, VPBank Securities Joint Stock Company

The DXY index (a measure of the strength of the USD, showing its correlation with 6 other currencies) is anchored above the 104 point mark. At the same time, the strength of the USD at the same time as the US Federal Reserve (Fed) cuts interest rates is the unknown that global investors are most interested in.

CME Group's FedWatch tool - which displays forecasts for interest rate hikes or cuts at Federal Open Market Committee (FOMC) meetings - unexpectedly recorded a significant change following statements from FOMC members last week.

Fed Chairman Powell has stressed that monetary policy makers will wait until there is more evidence that inflation is really under control, especially when the US economy is growing at a solid pace and the job market is still very strong with the number of jobs created in March being the highest in 10 months.

The odds of the Fed cutting its benchmark interest rate by 25 basis points at its mid-June 2024 meeting have fallen to 46.2%, after remaining oversold in recent months. Meanwhile, the probability of the Fed keeping rates unchanged has jumped to 51.8%, up from 39.6% a week ago.

This week, investors are focused on the European Central Bank (ECB) interest rate meeting, looking for clearer signals on the possibility of the ECB cutting interest rates as soon as June. Slowing inflation pressures and a dovish stance support this view. However, divergence in monetary policy management at the two major central banks (if any) could also put pressure on DXY.

In the context of many uncertainties, the pressure on the international market is still unknown, the State Bank has other tools to manage such as considering increasing the term of credit bills or inspecting foreign currency trading at banks.

In the latest statement at the recent regular Government press conference, Mr. Dao Minh Tu, Deputy Governor of the State Bank of Vietnam, affirmed that the State Bank of Vietnam considers exchange rate management as one of the most important and focused tasks. “In the coming time, the State Bank of Vietnam will continue to operate according to a very flexible mechanism, ensuring that the exchange rate can fluctuate in accordance with the general trend and ensure the goal of stability, harmony, and balance of foreign currency for the legitimate needs of the economy,” the Deputy Governor emphasized.

Source